(Bloomberg) – The iron ore roller coaster of 2021 shows no signs of easing, with prices ending an unprecedented drop to rise sharply as investors watch the China Evergrande group’s latent debt problems.

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The developer’s onshore real estate unit said it had reached an agreement with the yuan bondholders on the payment of interest, offering some relief after fears over Evergrande’s financial stability sparked a global risk leak. . China’s central bank has also injected short-term liquidity into the financial system, helping stabilize commodity markets.

In Singapore, iron ore futures soared more than 15%, rising above $ 100 a tonne from their lowest close in 16 months. Events around Evergrande scared the market earlier in the week and the steelmaking material was already oversold, said Atilla Widnell, Managing Director of Navigate Commodities.

Still, analysts warn that China’s steel industry faces prolonged headwinds. The steel ingredient, which was at the forefront of this year’s commodities boom, plunged 60% from a record above $ 230 a tonne in May. Restrictions on steel production, along with crackdowns on properties and concerns about a power shortage, weighed on demand for iron ore in China.

“With continued deployment of energy consumption restrictions, factory maintenance work has expanded, and structural steel volumes in particular have significantly decreased,” said Qiu Yihong, analyst at Haitong Futures Co. Demand has also been disrupted by the cases of Covid-19, bad weather and a wider weakness in real estate, manufacturing and autos, she said.

More pressure

Squeezing demand for iron ore could continue as China’s now mature steel industry faces new production caps, which plunged to a 17-month low in August. Jiangsu – a province with an economy as large as Canada’s – has cut the electricity supply to businesses, including factories.

As a result, iron ore will come under more pressure, falling to $ 80 to $ 90 a tonne by next year, said Wayne Gordon, strategist at UBS Group AG.

“This is probably the last hurray in terms of fundamental growth in steel demand,” analyst from Australia and New Zealand Banking Group Ltd. said Tuesday on Tuesday. Daniel Hynes on Bloomberg Television.

The fallout has been far-reaching. After the iron ore boom generated record dividends for the world’s largest miners, the BHP and Rio Tinto groups have since collapsed due to falling prices.

So far, iron ore has averaged around $ 178 per tonne this year, according to figures from Mysteel Global. UBS now expects the annual average to drop to $ 163 per tonne and only forecast $ 89 for next year. Liberum Capital Ltd. forecast $ 93 a tonne next year.

The biggest problem for Chinese steel mills is uncertainty, according to an executive at a major steelmaker. Production restrictions are tight, but there is still a possibility of a government stimulus, as producers are reluctant to buy iron ore given the risk of further price cuts, said the executive, who asked not to not be identified because he is not authorized to speak. to the media. Soaring metallurgical coal prices have also made it more difficult for steelmakers to provide coverage.

As demand diminishes, miners rush to export iron ore to meet annual targets. Vale SA shipments jumped 12% on a week-over-week basis, and cargoes from Brazil are expected to continue growing through the end of the year, according to UBS vessel tracking data. Port stocks, at 41 days of use, pushed prices down, the bank said in a report on Tuesday.

Always profitable

The bearish outlook for iron ore prompted UBS to reduce its sell recommendation of Fortescue Metals Group Ltd. and Vale. A small Australian producer was forced to suspend operations just after an expedition.

Still, big miners remain profitable: mining costs at Rio Tinto, for example, were between $ 18 and $ 18.50 per tonne this year.

“Today’s price, given the cost base of Australian producers, is still a very good price,” said David Radclyffe, senior mining analyst at Global Mining Research Pty Ltd. “It wasn’t that long ago that we would have said it was a good price for these producers.

The Singapore contract jumped to $ 107 a tonne, before trading at $ 106.40 at 6:04 p.m. local time. Iron ore futures on the Dalian Commodity Exchange closed up 6.3% and steel futures in Shanghai rose as trading in China resumed after a public holiday of two days.

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